Before entrusting a brokerage firm with your life savings, or any significant portion of it, spend some time evaluating the firm’s financial health. You’ll be glad you did if the firm ultimately perpetrates a securities fraud against you such as churning, selling away, unsuitability, over concentration, a Ponzi scheme, or other common investor legal claims.
In that unfortunate event, you may prevail at arbitration, but will the award be collectable? That could be a million dollar question. And you shouldn’t rely on insurance, because most brokerage firms are not covered for fraud-related securities claims.
Here are a few simple tools for investigating your brokerage firm’s financial health before you invest, or before it’s too late:
Review the brokerage firm’s Focus Report (X-17A-5)
The SEC requires brokerage firms to file an annual Focus Report (X-17A-5). Part III of the Focus Report requires the firm to disclose financial information such as a statement of financial condition, computation of net capital, and a statement of changes in liabilities. You can search your brokerage firm’s Focus Report online. Review the entire report for red flags. Specifically, take a look at the firm’s net capital. How does it compare to the size of the investments you could lose?
Review FINRA’s Broker Check
FINRA (Financial Industry Regulatory Authority) is the Self Regulatory Organization that oversees most brokerage firms. FINRA provides an online service called Broker Check. Search your brokerage firm and Broker Check will reveal certain disclosure events. The detailed Broker Check report includes information about pending and closed regulatory actions and specifics of certain customer complaints and arbitration filings.
Perform an internet search for recent lawsuits, arbitrations, or investigations involving your brokerage firm.
Perform an internet search for your brokerage firm along with search terms such as: investigation, lawsuit, arbitration, fraud, SEC, FINRA, settled, alleged, charged, and the like. This may reveal critical news about the brokerage firm.
These are a few simple tools for learning more about your brokerage firm’s financial health. An experienced securities attorney can assist you with additional due diligence.